Budgeting Step 5: Total Debts And Outstanding Bills
To begin to budget effectively you will need to find out how much you own in debts and outstanding bills. Many people who begin a debt payoff journey do not know exactly how much they owe when they first start out. You may know who you owe money to but, perhaps you do not the exact amount. The total sum off all of your debts and outstanding bills can come as a bit of a shock once all added up. Today is the day that you should write out a list of how much you own and who you owe it to before you can progress in your budgeting journey. Even though it can be frightening to face it, it is freeing to actually know that total number. Once you do, you can make a plan to tackle it.
How To Find Out How Much Money You Own In Debts And Outstanding Bills.
You will have an email correspondence and online statements with every institution you owe money to or a paper bill. If you cant find them, ring the institution and ask for an up to date statement to be sent to you. If you owe money to a family member, jog your memory by asking them directly. Check through your banking apps and bills folder to see what bills you are late on. Find the exact amount you are in arrears. And finally, add up all of those totals to get the total amount you owe in debts and outstanding bills overall.
What Is Debt?
Debt is money owed to any person for any reason regardless of the sum . I used to view my car payment as not being debt. I would catch myself saying things like, ‘no, I don’t have any real debt, I have a car loan but that’s different!’. The thing is, it is not different! It is money owed to an institution. It does not matter what I bought with it, it is their money! I think the confusion lies in how we attach emotional or moral value to borrowing money. Because my family needs a car as we live in a rural area, and I viewed having the car loan as the right thing to do. And it was the right thing to do, because I needed a car. But that is not the issue with debt and outstanding bills. Debt is simply money you owe to someone else and you need to pay it back! So by removing the emotional or moral value to any debt it just become ‘Maths’. The debt we owe is neither wrong nor right, it just is and it needs to be dealt with. When beginning your debt payoff journey, leave your feelings out of it when identifying your debts.
How Do I Work Out How Much Money I Owe?
Using the table below to jog your memory. Do you owe anything to anyone in these categories?
|Utility companies||Lease companies||Credit card companies|
|Credit unions||Store/ catalogue accounts||Family inc children|
|Banks||Friends||School/ college fees|
|Mortgage providers||Local businesses||Overdrafts|
- Search lender names in the search bar of your email app and see what comes up.
- Log in to the online account of each institution you own money to. A link or prompt to each is likely to be in your email.
- Write down the amount outstanding on each debt or bill in your notebook.
- If you can’t log in in this way, contact the institutions customer support by googling it.
- Gather any hard copies of credit agreements that you may have.
- Contact family members or friends you own money to and find out how much you still owe if you do not remember.
You need to give this step time. Do not guess amounts owed. Do your research and leave no stone unturned until you know EXACTLY how much money you owe in total and to who.
Methods Of Debt Pay Off?
This method advocates listing all of your debts and outstanding bills from highest interest rate to lowest interest rate. You then tackle the highest interest rate debt first. While paying the minimum payments on all of these debts, users of the avalanche method also commit to overpaying as much as they can afford on the debt with the highest interest rate.
Once the debt with the highest interest rate is paid off, the minimum payment from that debt is rolled over to the debt next on the list.
The method continue in this sequence, all the time once one minimum payment is no longer needed for the previous debt, the aggregate of all the minimums from debts paid is rolled over onto the next outstanding debt. The advantage of the debt avalanche method is that you can potentially save a lot of money by avoiding accruing interest on debts owed. Set up your debt avalanche debt pay off plan starting with the highest interest debts first.
With the snowball method, debts are listed smallest to largest. The minimum payments are to be paid on all debts throughout the method. As with the avalanche method, as soon as one debt is fully paid off, the minimum payment will be rolled over to the next debt. A commitment to overpaying as much as possible extra towards the primary debt is also a feature of the debt snowball method.
The difference between the debt snowball method and the debt avalanche method is that with the debt snowball you play off the lowest loan balance first regardless of interest rate. The theory is that by paying off a few small debts at the beginning of a debt free journey, it gives people a sense of hope and achievement early on. That psychological boost helps to drive people on towards their debt free goal in a powerful way. So you might say that the debt avalanche is a pragmatic method and the debt snowball is psychological method.